Our after-tax returns are higher than our pre-tax returns

That sounds impossible.

But when you factor in tax alpha, it can actually be true.

Some investments don’t just generate returns — they also pass through deductions that reduce taxes elsewhere in your portfolio. The real return is:

investment return + tax savings

Here’s one of the coolest wrinkles in the tax code.

Real estate depreciation creates passive activity losses (PALs). If you can’t use them right away, they get suspended.

When you dispose of the asset, those suspended PALs are unlocked and can offset ordinary income, not just passive income.

This is showing up in some of the preferred equity real estate investments we’re making.

The preferreds have an expected 13–14% return.

Depreciation creates PALs.

When we’re taken out of the position, those losses are unlocked and can offset income taxed at the highest rates — whether that’s earned income while you’re working or Roth conversions in retirement.

You’re allowed to take those deductions while also offsetting capital gains and depreciation recapture with capital losses from a tax-aware long/short SMA.

This takes the expected after-tax return from 13-14% to 15-16%.

Sounds crazy.

But this is what’s possible when you push the boundaries of tax-aware investing and actually integrate the different pieces of the puzzle.